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Vol. 13, No. 24 Week of June 15, 2008
Providing coverage of Alaska and northern Canada's oil and gas industry

Oooguruk unit produces first oil

Independent Pioneer is first company to join majors BP and ConocoPhillips as an operator of production in northern Alaska

Eric Lidji

Petroleum News

In the biggest step yet taken by an oil company in northern Alaska that doesn’t bear the name BP or ConocoPhillips, Pioneer Natural Resources has begun producing and selling oil from its offshore Oooguruk unit, the company announced on June 9.

The Dallas-based independent expects initial production of 2,000 to 3,000 barrels of oil per day from Oooguruk, developed from two pools, the shallower and smaller Kuparuk pool and the deeper and larger Nuiqsut pool. (See related story on page 15 of this issue.)

Oooguruk sits in the waters of the Beaufort Sea northwest of the Kuparuk River unit, operated by ConocoPhillips. Through an agreement reached between the two companies in February, Oooguruk oil will be processed at the Kuparuk facilities.

Pioneer won’t have much time to build up momentum on the new project. Oooguruk will be suspended for around 45 days this summer while ConocoPhillips conducts maintenance on one of those shared facilities, called Central Processing Facility 3.

Pioneer anticipates peak gross production of 15,000 to 20,000 barrels of oil per day in 2010 from approximately 40 development wells drilled over the next three years at Oooguruk. Over the 25 to 30 year life of the field, Pioneer expects the unit to produce as much as 90 million barrels of oil.

Pioneer owns a 70 percent working interest in Oooguruk. The Italian super-major Eni Petroleum owns the remaining 30 percent.

The Dallas-based company is the first independent operator on the North Slope.

Pioneer promoted faster development

Pioneer came to Alaska as one of the independent oil companies coaxed north by Denver-based independent Armstrong Oil and Gas in the early part of the decade.

The two companies partnered on early exploration efforts at what later became Oooguruk, until Armstrong sold its share of the leases to Eni in August, 2005.

Although Pioneer is one of the largest independents in the country, it is small by the standards of the global super-majors like BP, ConocoPhillips and ExxonMobil.

From its early days in Alaska, Pioneer said its smaller size gave it agility unseen in northern Alaska. The company planned to explore and develop sizable fields considered too small by the standards of the super-majors.

Pioneer also promoted faster “cycle times” for development. From the creation of the unit in July 2003 to production this summer, the company brought Oooguruk online in just less than five years, among the fastest timeline of any unit in northern Alaska.

By comparison, ConocoPhillips needed six years to bring the large Alpine field online in the late 1990s and early part of this decade.

Shift to maturing basin

As the first smaller company to make the leap from exploration to development in northern Alaska, Pioneer also became a symbol of industry discontent with the state during and following the special legislative session this past fall to raise oil taxes.

Pioneer executives and others in the industry used Oooguruk to argue that tax increases would challenge the relatively smaller profit margins or smaller projects.

Company executives and industry advocates also noted how Pioneer started exploring under one tax structure, permitting under a second and developing under a third as proof of the lack of fiscal stability in the state.

Ken Sheffield, the head of Pioneer in Alaska, even appeared in a television commercial saying, “the pipeline is only one-third full and production is falling, requiring billions of dollars of new investment to keep Alaska’s oil and gas industry going. Changing tax policy year after year is the wrong path to keep Alaska competitive.”

The state argued that expanding the tax credit system would balance the impacts of the tax increase and promote exploration. Even without production in the state, Pioneer made $75 million for its Alaska operation in 2007 by selling and receiving reimbursement for those tax credits.

The recent run-up in oil prices also made Oooguruk more economic.

When Pioneer first began exploring the Oooguruk prospect back in 2002 and 2003, the delivered price of the Alaska North Slope crude oil was around $30 a barrel, compared with recent prices hovering around $130 a barrel.

It cost more than $500 million to bring the Oooguruk unit online, including the construction of a six-acre gravel island in the Beaufort Sea, making it the largest capital project ever undertaken by Pioneer.

The company also has projects in the Rockies, Texas, Tunisia and South Africa.

New revenue stream for the state

The move into production means a new revenue stream for the state.

In the fall 2007 revenue forecast, state economists expected to see early production from Oooguruk in fiscal year 2008. By the spring forecast a few months later, the state bumped first production to fiscal year 2009. The state fiscal year begins July 1.

However, even at the anticipated full production rate of 20,000 bpd, Oooguruk won’t offset the expected declines from Prudhoe Bay and Kuparuk and the associated satellite fields, which have been dropping at a rate of 48,000 bpd over the past five years.

Completion of the gravel island and associated production facilities at Oooguruk contributed to a slight drop in construction spending anticipated on the North Slope this coming year, according to a forecast released in February by the University of Alaska’s Institute of Social and Economic Research.

The researchers, though, expect other independents to make up some of that decline.

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